Disney (DIS) reported earnings for their fiscal fourth quarter after yesterday’s close. The headline numbers were EPS of $0.30 on revenue of $20.15 billion, both big misses compared to the consensus estimates of $0.55 and $21.24 billion, respectively. The stock has reacted badly as you might expect, dropping around eight percent in premarket trading, but a deeper dive into the numbers indicates that the quarter was not as clear cut in its implications for Disney as that might lead you to believe.

For starters, Disney+ subscriptions were significantly higher than expected, coming in at 164.2 million versus the anticipated 160.45 million. That flies in the face of conventional wisdom that says that the competition in streaming and customer disaffection with paying for these services are hurting everybody in the business. In Disney’s case, it seems that bundling sports, movie franchises, and more conventional style TV is working, at least in terms of subscriber numbers. If you add up all the subscribers to different packages and services, Disney has 235 million subscribers, beating out the long-time leader Netflix (NFLX), with 223 million.

That is good news, but there are two problems in that part of the business. First, the earnings report also contained a warning that growth would slow next quarter, and second, this seems to be a case where economies of scale are working in reverse. The more subscribers they get right now, the more money the company loses in that division. On that basis, a slower growth rate might be a good thing, especially given the most likely reasons for that: price hikes and the introduction of an ad supported subscription tier next quarter. Actual profitability is still some way off but is finally visible, after CEO Bob Chapek said in the report that they expect to get there in fiscal 2024.

The market was also disappointed by results from the company’s parks, experiences, and products segment, which includes things like the cruise line and merchandising as well as the iconic theme parks. That disappointment, though, seems to be more about exaggerated expectations going in than any weakness in the results. Operating income increased by 66% on a 34% increase in revenue. Those are big numbers, and the implication of increased margins is also encouraging, but traders are instead focused on the fact that Wall Street had forecast marginally more on the top line, and that parks specifically fell short in terms of revenue.

The market has shown itself to be far more concerned about forecasts than backward-looking results this quarter, so I guess the principal reason that DIS is trading significantly lower this morning is the warning about slower-than-expected growth next quarter, but a case can be made that that was already priced into the stock at current levels, even before this morning’s drop. Assuming that it opens close to premarket levels, DIS will be within a couple of bucks of the 52-week low of $90.23 despite quite strong growth since then.

DIS chart

That is presumably a reaction to lower expectations for future growth, so a big selloff now when those expectations are reinforced doesn’t make a lot of sense.

For long-term investors, though, the most important thing is not the chart — it is Disney’s positioning. They have bucked the trend and grown streaming subscribers more than anticipated, and they have a large division focused on consumer experiences. Evidence elsewhere shows that consumers are increasingly spending their money on experiences rather than things, so the prospects there remain good, even if they did miss outsized forecasts for that division last quarter. What remains to be seen is whether or not they can operate their streaming services at a profit; if we assume that that will come at some point, DIS looks like a good long-term buy on this big drop.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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